There are three main types of analysis that most Forex Traders undertake, and how well you master them can greatly impact on your ability to make money and profit in the Forex Markets.
Let’s take a look at each of them in turn:
1/ Fundamental Analysis in Forex Trading
This is big picture thinking. In order to try to understand whether a countries currency will rise or fall, an analyst will look at the underlying macro-economic factors that are affecting the world, and then bring that analysis to bear on the local market conditions.
So, for example, if a Forex Trader were using fundamental analysis to try to reach an opinion of the immediate future for the price of the dollar, then they may review such statistics as:
- The employment situation.
- How many people are claiming benefits.
- The interest rates in the country.
- The credit rating of the country with such agencies as Standard & Poor’s.
- The Trade Balance.
- How the GDP of the country is doing- Is it going up or down?
- What are the current oil prices?
It is important to remember also that speeches by key figures such as the Chairman of the Federal Reserve Bank can also have a big impact on market movements, so it is worth looking at the calendar to assess when these important individuals are due to give public speeches that may affect the price of the dollar.
2/ Technical Analysis in Forex Trading
The primary idea behind technical analysis is that everything that the market needs to know to affect the price is already factored into the price.
This is important to realize because technical analysis is not some voodoo that is simply randomly following lines on charts. It is fundamentally a philosophy that the secrets to market movements are already visible in the charts, you just have to learn how to read them.
In many ways, it is often said that both technical analysis and fundamental analysis work best together, because each can give clues to how the other is working.
Additionally, technical analysis is commonly used in Forex Trading to decide entry and exit points based on levels of resistance and support on the charts.
3/ Market Sentiment in Forex Trading
Market Sentiment is the combination of everyone’s opinions about how the market is moving.
Sometimes this is unclear, while at other times the sentiment can be palpable, such as after great economic news, or more commonly during a market crash when everyone is selling or buying dollars.
Either way, developing a feel for how the market is feeling can certainly help in your trading.
Each of these three types of analysis has a role to play in helping you to deepen your understanding of how the Forex Market works, and it is well-worth learning more about each of them.